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VIDEO: Losses Hurt More Than Gains Help

What Prospect Theory tells us
Friday, October 21, 2016, 7:23 PM

As biological organisms, humans are motivated by pain and pleasure.

But interestingly, while we tend to think of these as equal motivators, they aren't. We humans are wired to be more risk averse than pleasure-seeking. As the works of Nobel recipient Daniel Kahneman explained:

Humans may be hardwired to be loss averse due to asymmetric evolutionary pressure on gains and losses. For an organism operating close to the edge, the loss of a day's food could amount to death, while the gain of an extra days food could lead to increased comfort but (unless it could be costlessly stored) would not lead to a corresponding increase in life expectancy.

And through the related findings of Prospect Theory, we actually know how much more we hate losses than we like gains. About twice as much:

The short video below uses these insights to deliver a simple message: In today's over-inflated, over-leveraged, over-manipulated markets, why on earth would a rational person not be prioritizing protecting their financial wealth?

Given the outsized risks, as well as our natural programming to feel losses more severely, pursuing incremental gains at this point is downright dangerous if one doesn't already have a contingency plan in place for a market downturn.

While most PeakProsperity.com readers already appreciate this message, there are many people out there who are still simply following the herd. We created this video for each of you to share with anyone you know who might benefit from a brief but direct "wake up call". Please take a moment to share it, and let us know any feedback you receive.

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12 Comments

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1428
The FED Once Again

The FED is responsible for distorting loss/gain perception.

Adam Taggart's picture
Adam Taggart
Status: Peak Prosperity Co-founder (Offline)
Joined: May 26 2009
Posts: 2933
Agreed

One of the big evils in this story is that the Fed's backstopping of the markets is giving investors a false sense that correction risk is much lower than it actually is.

That's why alerting people to the situation and reminding them of the true cost of losses is becoming more important than ever -- hence this video.

Grover's picture
Grover
Status: Platinum Member (Offline)
Joined: Feb 16 2011
Posts: 799
There's got to be more than money

Adam,

In a normal market, this would be great advice. Stock prices have been going nowhere but upwards since 2009. Sure, there's been some volatility, but we're still near all time highs in the major US stock indices. Normally, this means that sooner or later, we'll revert to the mean (whatever that means.) It is easy to argue that it will happen sooner rather than later.

To me, the big questions resolve down to 2 issues:

  1. Is this a normal market?
  2. Where can all the money in other countries hide when their economies collapse?

Given all the fudging by the central banks, we really don't have normal markets. As such, we really can't rely on past performance to guide future performance. All the tried and true rules don't comport with the new reality.

From all I've read, I'm convinced that the US market is the least ugly horse in the glue factory. Europe is in a major struggle for its unified identity and currency. We hear of problems arising every day (Brexit, Frexit, Grexit, etc.) Then, there is Japan where they will drive negative rates more negative until inflation actually rears its ugly face. Can China come to the rescue with all of their insolvencies? I've read that the entire Russian stock market is worth less than Google. Are any of the BRICs doing well? Other than the US markets, there isn't any economy/stock market large enough to absorb the fleeing big money from these countries.

It really doesn't matter if stock P/E ratios are astronomical. Who would have guessed that stocks would be competing with negative interest rate bonds? Not me. I think big money will be focused on return of investment rather than return on investment. Where else can it go? Some can hide in government debt, but the payback is really tied to their underlying economy. If the economy fails, so does the government bonds. How many Zimbabwe dollars does it take to buy an egg?

With the rules all changing, does it really make sense to focus disproportionately on monetary investments? I'd rather be poor with a full pot of good soup and good friends to enjoy it with rather than be stinking rich just before the collapse. (Good friends will help you refill the soup pot when it is empty.)

Grover

Eannao's picture
Eannao
Status: Silver Member (Offline)
Joined: Feb 28 2015
Posts: 133
Sound Quality

Hi Adam,

great video - really enjoyed the historical perspective on the 2007 crash. It was a useful reminder of just how brutal it was and how quickly unemployment jumped. Just one suggestion: while the sound quality is okay, it isn't great - it sounds a bit tinny, which undermines the overall quality of the production. You might want to look at your audio setup for future recordings. Obviously, the video's content is great, which is the main thing!

Thanks, E.

Eannao's picture
Eannao
Status: Silver Member (Offline)
Joined: Feb 28 2015
Posts: 133
A Different View

As a European, Peak Prosperity is my main source of information and opinion about the US, and I sometimes wonder if has given me an overly negative perspective. I'd be interested to hear peoples take on this YouTube video. It's obviously a completely different perspective from a banking insider, but I think he makes some valid points about the huge advantages which the US enjoys:

LesPhelps's picture
LesPhelps
Status: Platinum Member (Offline)
Joined: Apr 30 2009
Posts: 724
Adam Taggart wrote: That's
Adam Taggart wrote:

That's why alerting people to the situation and reminding them of the true cost of losses is becoming more important than ever -- hence this video.

Has anyone else noticed that this topic, in fact the entire Crash Course message falls decidedly under the category "shoot the messenger?"

Some day, perhaps that will change, but so far it hasn't.  It's not that people don't believe, it's that they don't want to be reminded.

robie robinson's picture
robie robinson
Status: Diamond Member (Offline)
Joined: Aug 25 2009
Posts: 1148
"Shoot the messenger "

It is easier to mislead people than convince them they have been misled.

 

Kim L. Law's picture
Kim L. Law
Status: Member (Offline)
Joined: Dec 5 2014
Posts: 19
Zero Sum Game

Unfortunately money is not a resource. It's merely a system of resource distribution. In the world PP think we are headed, having more or less money is completely irrelevant to the grand scheme of things. The only minor difference of having more money is that you can invest it in truly productive enterprises / material goods today, instead of having other people spend it on (encouraging) useless activities.

The real issue is Energy relative to our population size. Energy of food, energy of fuel, energy for warmth, energy for production and refinement of goods and materials, energy of human beings, energy of the living system.

If only money would solve all of these issues (for our sakes).

Michael_Rudmin's picture
Michael_Rudmin
Status: Platinum Member (Offline)
Joined: Jun 25 2014
Posts: 772
Okay, I'm an American, and I'll say what I think.

Okay, I'm going to pick apart what he says. 
Some of the things he said include: 

Let's raise rates?  Quite possibly I agree. More than that, dump the Fed owned stocks.  Dump the market manipulation for the benefit of the big players.  Better than that, get rid of the fed entirely.  Don't do anything to set rates. 
Just, nationalize all those big banks first, and distribute their falsified winnings back to the people.  JP Morgan, Goldman Sachs, Bank of America have got to go.

I disagree with the infrastructure argument.  When the government does infrastructure, it leads development at best; at worst, the infrastructure ends up a waste.
There IS no right, when people are not able to decide for themselves what they need.  There is one thing that a command economy (which a finance economy necessarily is) is good for, and that is war -- with which we have gifted the world for two hundred years.

So when he says "the interest of your country should be put before the interest of your industry"... he is saying it is time to go to war.  Tighten your belt, so that we can conquer the next neighbors.

"Unemployment is at 4%".  That is incorrect.  New unemployment that the government chooses to track stands at 4%.  Check mishtalk.com; actual unemployment of people who would want a job if they had a chance at getting one is at over 40%; underemployment is much higher than that. 
In addition, of the new hiring that has been done, the vast majority, two years ago, was illegal aliens and H1B slave workers who were trained by US upcoming-layoffs to replace their US counterparts.
More than that, the bailout gutted mainstream America.  The entire cost for that is being borne by those who work wage jobs -- that is why the median US savings account / retirement account / invstment account is less than $3000 per family.
More than that, US people by and large -- if they work for a living -- do not own their own homes. 
More than that, the recent unemployment has been replaced by part time employment, with an extra 20% tax in the name of Obamacare.

"When we look at the economy... fifteen million working, wages up"... Yes, but takehome pay is way down. 
"America has the best hand ever dealt to any country ever."  No.  What he is describing, also matches Spain before the Spanish Armada.  It matches Rome before the Vandals sacked the entire republic.  It matches England in the years that they said "The sun never sets on the British Empire". 
All the fundamentals are wrong; the assets are all going to the look and feel, and where they aren't going to the look and feel, they are going to try to destroy competitors in war.

Don't think that isn't going to bite us -- it has EVERY SINGLE TIME.  Our problems with illegal immegrants come out of the refugee influx from central America.  That comes out of the wars and drug gangs, which were SET UP IN THE FIRST PLACE for the benefit of Chiquita Bananas (ever hear the term 'banana republic') and other companies, by the CIA- Georgia-based School for the Americas.
The Al Qaiada/Taliban/ISIS/Arab Sprign attacks, if not directly run by the US security establishment, were at least in response to our attacks in the Middle East and Afghanistan. 

"We have peaceful wonderful neighbors in Canada and Mexico".  Does he refer to all the beheadings in Veracruz?  Or the MS13 gang killings in New York City and Washington DC?  How about the  "We have all the food, water, and energy we will ever need".  No.  As American workers' wages are taken to fund Obamacare, we / they are going homeless in increasing rates.  The spike in suicides is not for nothing.
"We have the best universities on the planet".  Again, no.  I watched the decline of the University system in the 1990s.  The universities have lost their mandate, and instead more and more function as playgrounds.  Hand in hand with that, university degrees don't pay off.  I got a dual Aerospace and Ocean engineering degree; I now use what I learned in civil, in bridge building.
However, I married late (25 years old), and had children later (first one at 28, second at 35), and my oldest is now 18.  I don't have enough money to send him to college; I have $8k malinvested in palladium (it wouldn't be, if it weren't for central bank meddling to the benefit of these megabanks); I own my own trailer home, but rent the lot.  When I signed on, rent was $175; but then it went up 15% seven years running. 
I have a 1/16 acre garden which I am training my son to work, because I am not going to waste the money on a university degree, when degrees don't pay, because the wealthy don't pay, and the government loots the workers.
So if the university is a waste then I have to disagree with his statement that we have the best in the world. 

"We have the rule of law, which is exceptional"  HAAAH!   I have to crow at that one.  You'll probably know about all the exceptions made for Hillary clinton.  All the exceptions made for the bankers (who should be in prison).  But that's been happening since the 1990s, too.  In my hometown of HArrisonburg, the head of the better business bureau, a business professor at James Madison University, had been using his grad students, as well as women from a battered women's shelter for prostitutes.  The husband of one of the girls killed him.  In his defense, he called what was probably one of her clients to the witness stand... the president of JMU.  He said, "I'm a public figure, so I don't have to testify."  The judge, a local who may have also been compromised, agreed... without ANY basis in law. 

"We have a magnificent work ethic..."  we have two kinds of slavery:  wage slavery (I'm one) and welfare slavery, and the purpose is to destroy the wealth of the poor, so they cannot challenge the dominance of the powerful.  That is what he is referring to as work ethic:  the slavery of the working poor.  Do you want to bet whether he himself has a work ethic?

I have been to Europe.  I lived in Lithuania, and THEY HAVE IT BETTER. At least, they did in 2000, before the US and germany began their looting... Their universities are better; their work ethic is better; they don't have the welfare slavery.  They do have some of the wage slavery.  They own their own homes for the most part; they work their own gardens. 

I've only gotten through 15 minutes of the 45.  Do I need to go on?  For the 1%, things are okay.  For the top 0.1% who receive all the loot, things have, as he says, never been better.  99 out of 100 will say that they guy is blathering nonsense, and the host isn't going to have the sense to recognize that fact.

Could interest you, in turn, in watching a 5-minute video involving a talk show with as much sense?
 


 

Adam Taggart's picture
Adam Taggart
Status: Peak Prosperity Co-founder (Offline)
Joined: May 26 2009
Posts: 2933
Audio upgraded

E -

I had to record the initial audio for this under less-than-ideal circumstances. We were able to re-record it this morning and have replaced the former audio track with the new. I'll think you'll find it much improved.

badScooter's picture
badScooter
Status: Silver Member (Offline)
Joined: Jun 20 2011
Posts: 152
Jamie Dimon

Deleted.  I have nothing good whatever to say about him or his kind.

David Allan's picture
David Allan
Status: Bronze Member (Offline)
Joined: Nov 15 2009
Posts: 99
One step beyond

'Move towards' vs 'move away from' is probably the meta program polarity that affects our lives the most.

What we spend our time and energy focusing on is the key to success or failure. Focus on what you want and you're more likely to get it - your brain starts working out the practicalities - how could I feed my hens without commercial grain... how can I make cheese from my house cow if commercial starters and rennet is not available? These are not insolvable problems but they do take focus.

Losses might hurt more than gains help, but the real potential is one step beyond simply moving away from pain. Focus on what you want - then take action.

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